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One of the hardest, most important decisions homebuyers face is
how much to offer for their home. And the glut of
information on the web about real estate only makes buyers even
crazier than the decision itself does. Supply, demand,
foreclosure rates, mortgage rates – buyers think they need to run
spreadsheets and do fancy math to make a smart offer. And
THAT can be super intimidating.

But the fact is, there is a pretty short list of steps you need
to take to make a smart offer – one that gets you a great value,
but is also likely to be successful at getting the property. (A
low offer does not make for a great deal if you don’t get the
house!) And most of the same steps apply to sellers trying
to set the list price that will lure the most buyers (and net
them the most cash)!

Step 1: What do the “comps” say? First
things first. When it comes to pricing a home, or making an offer
to buy one, the ‘first thing” is the home’s fair market value.
Both buyers and sellers should work with an experienced, local
agent to understand what the home’s value is. Most agents will do
this by offering you a look back at similar properties that have
recently sold in the neighborhood – i.e., the comparable
sales, or comps.

HINT: You can also find comps for a home listed
on Trulia by scrolling down to the section labeled
Sold Homes near 1234 Merriweather Lane on the property's Trulia
listing page.

Ideally, look for comparables that are very recent sales (3
months or less before you’re listing or buying), very similar
properties (i.e., same number of bedrooms, bathrooms, square
footage; and similar style, condition and amenities). If you do
get into contract, these may be the same comparables which will
be considered by the appraiser, so looking at them before making
an offer can:

(a) provide factual support for a lower-than-asking offer or for
the asking price, in a negotiation, and

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(b) result in a sale price at which the property will actually
appraise, later on - avoiding the common glitch of the deal
falling through because the appraisal comes in way below the
agreed-upon price.

Also, looking at comps is the first step for locating a home’s
seller and prospective buyer in the reality-based universe of
current home values. The fact that you bought or
refinanced the place at a given value 5 or 6 years ago is
entirely irrelevant to what it’s worth today, as is the buyer’s
belief that the place was worth $100K less at the trough of the
market, in 2009.

Step 2: What can you afford? This
step is much more critical for buyers than for sellers.
(Unfortunately, sellers, the facts that you need to net a
particular amount to buy your next home or pay your existing
mortgages or credit card bills off has no relationship whatsoever
to the price at which you should list or will sell your home.)

Buyers – it’s a must to make sure that your offer price for any
given home falls within the range of what is affordable for
you. This includes offering a price within the range for
which your mortgage was preapproved, but also includes making
sure that the monthly payment and cash you’ll need to close the
deal (down payment + closing costs) are affordable in light
of the particular house. If, for example, the property will
require repairs for which you’ll need to conserve cash, or has
HOA dues you hadn’t planned on, you may need to rejigger your
offer accordingly.

Step 3: What’s your competition? (And what’s
theirs?) This is another step at which it’s
critical to check in with your agent. You need to know what level
of competition you’ll face – whether you are a buyer, or a
seller. As a seller, you can find this out by looking at
things like how many comparable homes are listed in your town or
your neighborhood in your general price range (your agent will
brief you on this). Sellers should also consider what type
of transactions their home will be up against – the more
distressed properties (foreclosed homes and short sales) with
which your home must compete, the more aggressive you must be
with your pricing to get your home sold.

The more competition you have, as a seller, the lower you should
tweak your list price to attract buyers to come see your home.
(And the more buyers come to see your home, the more likely you
are to get an offer!)

Buyers should also be cognizant of the competition level they
will face for homes. Believe it or not, even on today’s
market there are properties and neighborhoods in which multiple
offers are the name of the game. Work with your agent to
understand the list price-to-sale price (LP:SP) ratio , which
lets you know how much under or over the asking price properties
are selling for in your target home’s neighborhood; the higher
the LP:SP ratio, generally speaking, the less competition there
is among buyers.

Your agent can also brief you on:

(1) (1) The number of offers – if any -
that have been presented on “your” property (which the listing
agent will usually, gladly tell). If there are other
offers, you’ll want to make a higher offer to compete
successfully against them; and

(2) (2) The number of days the home has
been on the market, relative to how long an average home stays on
the market before it sells – the longer it has, the more pressure
is on the seller, price-wise, and the less competition the buyer
is likely to have. (One exception is the sweet spot
scenario, when a property that has been on the market for a long
time has a price reduction and gets a bunch of offers as a
result! )

4. How much do they need to sell (or buy)
it? Buyers: Has the listing in which you’re
interested been reduced at all? By how much? Has the
listing agent informed you that her clients are highly motivated,
flexible or have an urgent need to sell?

Sellers – most buyers are not in a high state of urgency to buy
these days, given the long-term, high affordability of homes and
interest rates, except when they have an urgent personal reason
for moving, e.g., buyers who are relocating for work. Of
course, all of real estate is hyperlocal, so it’s important to
understand how motivated buyers are in your local
market, generally speaking, before you set your list price.

Trulia’s new, interactive Price Reductions Map offers a number of clues to
critical indicators of buyer and seller motivations in your
home’s town and zip code, in just a click on the map -
including:

· how many homes
in your target property’s area have had at least one price
reduction,

· how likely a
home in the area is to have multiple price reductions.

The higher these numbers are, the stronger of a buyer’s market it
is, and the more bargaining power buyers likely have.
And if you’re the seller, the higher these numbers
are for your area, the lower you may need to price your home to
be successful at getting it sold.

5. How much do you want to buy, or sell,
the place? Step #4 was about taking the
motivations of the folks on the other side of the bargaining
table into account when formulating your offer and your list
price. This step is all about you – what’s your
level of motivation? Now, buyers, you certainly shouldn’t
offer a price way above what the place is worth (see Step #1)
just because you really, really want it, unless you have the cash
to throw around. But within the range of the home’s fair
market value, it may make sense to move higher within that range
if you are highly motivated to get that particular property.

Sellers: think of your list price as the most powerful marketing
tool at your disposal. if you really want or need to sell, get
aggressive about setting your price as low as makes sense for
your your home's value and local market dynamics to attract
qualified buyers and help your home stand out against all the
competition.